Drop in jobless rate puts Fed closer to end of QE3: Fed's Fisher

PORTLAND, Oregon (Reuters) - The Federal Reserve is nearer to dialing back its massive bond-buying program after the unemployment rate dropped last month, a top Fed official said on Monday, the second to make that point in as many trading days.

Federal Reserve Bank of Dallas President Richard Fisher speaks about the concept of breaking up 'too big to fail' banks to a breakout group at the Conservative Political Action Conference (CPAC) in National Harbor, Maryland, March 16, 2013. REUTERS/Jonathan Ernst

A stalwart opponent of the Fed’s current third round of quantitative easing, or QE3, Dallas Fed President Richard Fisher said he personally would have liked to start trimming the program some time ago.

“I am of the opinion that unless we see some disturbing data...that we should start in September,” Fisher told reporters after a speech here, adding that he is not alone at the Fed in that view.

The U.S. central bank is buying $85 billion in long-term securities each month in order to keep borrowing costs low and boost hiring and investment.

Fed Chairman Ben Bernanke said in June that the Fed would probably make cuts to the program later this year, with an eye to ending it by mid-2014, when unemployment will likely be around 7 percent.

“Having stated this quite clearly, and with the unemployment rate having come down to 7.4 percent, I would say that the (Fed’s policy-setting) committee is now closer to execution mode,” Fisher told the National Association of State Retirement Administrators in Portland, Oregon.

A government report on Friday showed that the jobless rate last month fell to 7.4 percent, its lowest since December 2008.

Fisher also weighed in on the question of who could succeed Chairman Bernanke, whose term expires in January and who has given no indication that he would stay in the job.

Arguing that what the Fed needs is a leader with “great humility” rather than a “prima donna,” Fisher said he is aware that there are people other than those who are regularly in the press who are being considered.

The remarks suggest that President Barack Obama could pick someone other than Fed Vice Chair Janet Yellen and former Treasury secretary Lawrence Summers, currently seen as front runners for the spot.

Fisher also said he had high regard for all those who have been named as potential contenders, including former Fed vice chairs Don Kohn and Roger Ferguson, and would be “honored” to serve under any of them.

He said he was confident Obama will make the right pick to lead the U.S. central bank, and will make humility a “major consideration” in his decision.

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The report showing the unemployment rate had fallen in July came two days after the Fed ended its regular policy-setting meeting, at which it made no changes to its bond-buying program and gave no indication it was moving closer to reducing it.

The program has helped buoy the housing market and the public stock market, Fisher said on Monday.

But the false idea that the buying will continue forever can encourage improper allocation of capital, he said, and it is important to let the public know that the Fed will eventually end the program.

“In June, I argued for the chairman to signal this possibility at his last press conference and at last week’s meeting suggested that we should gird our loins to make our first move this fall,” Fisher said.

Fisher is among the most hawkish of U.S. central bank policymakers, and his views are often at odds with those at the core of the Fed’s policy-setting committee. He is not a voter on the committee this year.

But on Friday, St. Louis Fed President James Bullard, who is a voter this year, also said the decline in the jobless rate puts the Fed closer to ending its current round of quantitative easing, though Bullard said he wants to see more evidence of a strengthening economy before calling for cutbacks.

Fisher has opposed the bond-buying program since its inception last September, arguing that quantitative easing has not been very effective. He also said he was concerned the bond-buying could kindle future inflation or distort markets.

The Fed now owns about 20 percent of U.S. Treasuries and 25 percent of all mortgage-backed securities, a “significant slice of these critical markets,” he said. “This is, indeed, something of a Gordian Knot.”

Releasing that knot is a delicate task. When Bernanke laid out the central bank’s likely timeline for ending the bond-buying program, bond yields soared and stocks tanked.

“When the right time comes, we must carefully remove the program’s pole pin and gingerly unwind it so as not to prompt market havoc,” Fisher said.

To calm markets, Fed officials have emphasized that an end to bond buying does not mean the Fed will soon raise rates.

About half of U.S. primary dealers - Wall Street banks that deal directly with the Fed — believe the Fed will start reducing its bond purchases in September, with the other half expecting reductions later.

“The committee has to feel its way through here,” said Fisher, adding that estimates suggesting sluggish second-quarter GDP growth would likely be revised, and noting his own surprise at the recent strength of retail and manufacturing data. “It’s a question of how you feel things are moving.”